Difference Between Equity and Shares
The key difference between equity and shares is that equity is the sign of ownership in any business entity which implies that somebody has ownership rights in the year marked entity and equity is not allowed to trade freely in the market, whereas, share is portion of equity which is measured in terms of number, value and/or percentage in that entity and the share can be easily traded in the market through stock exchanges.
The corporate world is all about owning the equity and the quantum of the shares held by individuals directly or indirectly. The holding of equity determines the ownership and managerial control of the holder of the shares.
What is Equity?
Equity basically means the ownership stake in the company. In layman’s term, it means ownership capital or net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.read more after repayment of all the debts. Equity investments are generally bought with the expectation to enjoy the price appreciation and to grasp the opportunity to enjoy the increase in value. It provides the cushion of a benefit of ownership as well as its utility in day to day life.
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Source: Equity vs Shares (wallstreetmojo.com)
What is Shares?
Shares are the unit of the capital of the company or other entity, by acquiring the same one can get ownership of the company. Shares are the pieces of capital, freely tradeable in the market in the stock exchange. The holding of shares determines the proportion of equity held by any individual directly or indirectly. This gives the opportunity to hold the investment in any entity for the long term as well as short term, thus share contracts are easily tradeable and can get squared off in the stock exchange.
Let us take an example.
- Mr. A buys a house worth $1 million, by taking a bank loan of $800,000. In the said transaction, Mr. A holds equity of $200,000 in the house, i.e., 20%.
- Another example, In XYZ Ltd, Mr. A buys 20% of the shares at market value. By buying these, it can be said that Mr. A holds a 20% ownership stake in the entity.
- Mr. Y buys shares of Reliance limited from the stock exchange, here shares are freely bought from the market either to earn the benefit of short term price movement or to enjoy the appreciation of the value in the investment.
Equity vs. Shares Infographics
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Source: Equity vs Shares (wallstreetmojo.com)
Key Differences Between Equity and Shares
- Equity is the ownership stake in the entity or such other valuable business component, while shares are the measurement of the ownership proportion of the individual in that business component.
- Equity will be available in all the business structures, which may be proprietorship or partnership or corporate structure, while Shares will be available only in the corporate structure.
- Equity is generally not freely tradable in the market as it directly affects the holding of the business entity, while shares are easily tradable in the market by means of the recognized stock exchange.
- Equity includes shares stocks and other ownership capital, while shares include only equity share capital and preference share capital.
- Equity investments are generally riskier as the person holds the ownership interest in the entity which will keep them open to all the risk faced by the entity and generally they are unlimitedly liable for their own interest while share investment is comparatively less risky as they are only liable up to the subscribed capital in the entity and hence they have liability only up to face value of the capital.
- Generally, equity investments are for the long term, while share investments are for the short term.
- The primary aim of equity investors is to earn the profit out of investments and appreciate their value while the intention of share investors is to enjoy short term price movement.
- Equity is a comparatively broader term as compared to share.
- Equity instrument holders do not always have the right to receive dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more, while shareholders always entitled to dividend rights.
Comparative Table
| Basis | Equity | Shares |
|---|---|---|
| Tradability | Equity is the ownership stake that cannot be easily tradable in the market. | Shares are easily tradable at the stock exchange. |
| Investment in business type | Equity is generally found in all forms of the business, like proprietorship, partnership, or corporations. | Shares are generally seen in the companies only. |
| Dividend | If it has a share component, then only they are entitled to the dividend rights. | Shares are always entitled to have dividend rights. |
| Includes | It includes shares, stocks, and all tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more, excluding debt and fictitious assets. | They include equity shares and preference shares only. |
| Risk | Equity is comparatively riskier as it is attributable to the ownership of the entity, so equity holders are directly facing the complexities faced by the entity. | Shares are comparatively less risky as the investors are liable for only up to the capital owned and subscribed by them. |
| Broader term | It is a much broader term compared to share. | It is a comparatively narrow term. |
| Example | The person invests $100,000 in business, now if in that business no debt is there, then that person is termed as holding 100% | The person buys 1000 shares of reliance, where he will be considered as shareholder proportion to 1000 shares in the company. |
| Intention | Investor’s primary intention is to earn a profit by investing amount for the long term. | Investor’s primary intention is to enjoy short term price movement. |
| Subset | All equity does not share. | All shares are equity. |
Conclusion
In general parlance, people do use equity and shares interchangeably. But fundamentally, there is a difference between both the terms.
Equity investments are the primary investments that boost the entity in raising the money and give investors appreciation in their investment values gradually. In contrast, share investments are made by the trader in the stock market. Their main aim is to speculated and to earn the short term price gain. Equity components involve the shares, stocks, reserves, and own funds; hence it is much broader term while shares are part of equity, and hence it is the part of the same.
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